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Recovering an Additional Insurance Payment: An Unethical Process?
Jessica has been practicing insurance for 14 years. She has developed expertise designing insurance programs and developing Risk Management Plans exclusively for condominiums, cooperatives and large HOAs. She is a Vice President at the USI Community Association Insurance Practice. Jessica holds the Certified Insurance Counselor (CIC) professional designation and is a CAI Educated Business Partner. She was elected as one of the 12 members to lead national Community Association Institute (CAI) as 2020 – 2022 CAI’s Business Partner Council in an At-Large position (Insurance Broker). This position allows her to provide input on policy matters to the CAI Board of Trustees. She actively participates in the Education, Legislation and Membership committees of the Washington Metropolitan Chapter (WMCCAI).
Recovering an Additional
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Insurance Payment: An Unethical Process?
One could say it is common knowledge that common-interest communities in the DC metro area have a specific insurance requirement to purchase an “All Risk” property policy, equal to full “Replacement Cost Value (RCV).” This means that even if a highrise was built in 1981, an insurance company would repair the physical damage without deducting the depreciation accumulated in 39 years. However, what is not common knowledge is that an insurance company will not voluntarily pay the replacement cost value. The initial payment will almost always be “Actual Cash Value (ACV)”—meaning RCV minus depreciation. In order to obtain full RCV, the Community Manager or Board of Directors will need to take an extra step to recover the depreciation that was intentionally deducted, hence the name “Recoverable Depreciation.”
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allianceassociationbank.com Unfortunately, numerous claims are closed with only ACV paid, and many associations fail to take the extra step to recover the depreciation they are entitled to. Surprisingly, during an insurance webinar in August 2020, organized by the Washington Metropolitan Chapter Community Associations Institute, 30% of the attendees reported that they had never dealt with this process.
It is expected that some people will perceive this practice as unethical. Nevertheless, all property insurance policies have a provision under the Loss Conditions section that clearly states that claims will be paid on an ACV basis first. The provision also clarifies
SIMPLIFIED EXAMPLE: How recoverable depreciation is paid on a damaged roof
Replacement cost Subtract depreciation (8 years old / 20 year lifespan = 40%) Actual Cash Value Subtract Deductible Net claim (first payment) Add recoverable depreciation (second payment)
TOTAL CLAIM AMOUNT
$90,000
that in order to obtain the recoverable depreciation, an insured is obligated to submit paid receipts of the repairs or replacement of the lost or damaged property. Therefore, there is full disclosure of this complicated process, but it may be buried in hundreds of pages of the master policy. It is our responsibility as insurance brokers to educate Community Managers and Boards of Directors to understand how this process works.
Top 5 FAQs:
1. If we paid for a master policy with RCV, why do insurance companies complicate the process and only pay Actual Cash Value initially? Because it discourages fraud and gives associations the incentive to spend the money on only necessary repairs according to the estimated damages reported. 2. How do we avoid missing the recoverable depreciation? Keep all receipts and ask your insurance broker if they have a special tool that you can use to keep track of claims and payments. You can also use an Excel spreadsheet. 3. What happens if multiple units were affected and each resident hired their own contractors to repair the units? Each resident will need to provide copies of the receipts to management. My recommendation is to discourage this practice and let the association hire one contractor to do all the repairs. 4. Why was the claim closed before I recovered the depreciation? Insurance companies will not make multiple attempts to notify an association that it is entitled to an additional payment. Most carriers will send a letter notifying the association and broker that the claim is being closed and offering to reopen the file to adjust the claim settlement. Sometimes however, this notification may be overlooked. I recognize that this is not an easy process, but that is why it is so important to increase awareness. 5. What if we switched management companies and don’t know if the depreciation was ever recovered? This is actually one of the most common reasons why an association fails to recover the depreciation. Nobody had an unethical intention—it just fell through the cracks during the transition, or the notification from the carrier was mailed to the former management company.
Communication is the key! It is crucial to ask your insurance broker to walk you through the details of your loss runs annually to determine if there is any potentially recoverable depreciation. If you file claims frequently, you should discuss this with your broker quarterly or semi-annually.
The good news is that even if the claim was closed years ago, it may not be too late. There could be a Statute of Limitations on the recovery of the depreciation based on the specific jurisdiction—up to five years in VA and up to three years in MD and DC. Additionally, insurance policies include specific time restrictions under the Valuation/Loss Payment section. Never hesitate to ask your insurance broker to negotiate an extension with the insurance adjuster.
